Outsourcing is on the upswing, but most business still consists of small projects that were delayed because of tighter spending during the recession

India’s largest outsourcer, Tata Consultancy Services (TCS), posted strong revenue and profit growth in U.S. dollar and rupee in the quarter ended June 30, as demand for offshore outsourcing services rebounds.

The company said on Thursday that its revenue had grown in dollars by 21 percent to $1.8 billion, while profits were up 29 percent to $403 million from last year.

The results are in accordance with U.S. GAAP (Generally Accepted Accounting Principles).

“We are seeing a very good demand environment across industry verticals,” said N. Chandrasekaran, the company's CEO and managing director, at a press briefing in Mumbai, that was also web cast. The company signed 10 large deals in the quarter, and is currently pursuing 15 more large deals, he added.

The outsourcing market is on the mend, but most of the business still consists mainly of small projects that were delayed because of tighter spending by customers during the recession, according to analysts.

TCS and other Indian outsourcers are facing an increase in staff attrition, as hiring of Indian staff has picked up after a lull last year. Retention of staff is a top priority for TCS, Chandrasekaran said.

The company raised Indian staff wages by an average by 10 percent during the quarter, with more increases likely in the current quarter as it plans to promote some staff this month. Salaries of staff abroad increased from about 2 percent to 8 percent. Staff attrition in the quarter still went up to 13.1 percent from 11.5 percent last year.

The company has increased its hiring target for the fiscal year ending March 31, 2011, to 40,000 from 30,000, to address increased business and the attrition rate, which reached 20 percent in the company’s business process outsourcing business.

The company added 3,271 employees in the quarter, taking the total staff to 163,700.

TCS, like India’s second largest outsourcer, Infosys Technologies, also saw revenue from Europe coming down as percentage of total revenue, because of the debt crisis in some countries in the continent. Revenue from Europe was down to 24 percent of total revenue from 28 percent last year.

Infosys reported Tuesday strong revenue growth for the quarter, but profit growth was slower in dollar terms, and negative in rupees, because of currency fluctuations, and a wage increase during the quarter.

The recovery by Indian outsourcers, particularly the profit margins, may not be sustainable in the next three to five years, according to analysts. Customers are consolidating and reducing the number of vendors providing services to them, and are likely to negotiate lower rates with the remaining suppliers because of the increased volume of business, said Jimit Arora, research director for supplier intelligence at Everest Group.

As Indian outsourcers target U.S. business in critical sectors such as government and health care, and look at value-added services, they will have to set up large delivery operations in target markets like the U.S., Arora said. Hiring skilled local staff with strong knowledge of the business in the U.S. will require Indian outsourcers to pay salaries far higher than in India, thus further cutting margins, he said. The old model of sending staff from India will not work, Arora said.